One of the most anticipated initial public offerings (IPOs) of 2024 was Reddit (RDDT 10.04%), a social media company that is best known for its subject-matter forums, called subreddits. It's a landing page for people interested in researching a topic but also looking for user feedback and commentary.
In general, IPO stocks tend to be surrounded by excitement. And given Reddit's popularity, the company's market debut has garnered a lot of scrutiny. Let's dig into whether or not the stock is a good buying opportunity and assess some of the risks.
A popular platform with intense competition
The social media realm is fiercely competitive. But with 73 million daily active users, Reddit has proved it can reach critical mass and spur user engagement.However, it doesn't have as broad a reach when it's benchmarked against other such platforms.
Meta, which owns Facebook and Instagram, has 3.2 billion daily active users across its various apps. Alphabet's Google and YouTube consistently have over 100 billion site visits per month, making them the world's top two most-frequented websites. And the review board Yelp averages about 74 million monthly unique visitors across desktop and mobile formats.
Reddit competes with all of these platforms in some capacity. And yet, despite the company's renown, its engagement is actually much smaller than other social media businesses. As a result, the company's growth has been somewhat mundane.
Revenue increased 21% last year, but the company is still hemorrhaging cash, posting a net loss of $91 million in 2023. Although this was an improvement from the prior year, I question Reddit's long-term potential given its smaller size compared to the competition.
Since advertising is the primary form of revenue, it's difficult to see a path whereby the company's growth really begins to accelerate and consistent profitability becomes a hallmark of the business.
Image source: Getty Images.
Is Reddit an AI opportunity?
Around the time of the IPO, Reddit began to unveil a new marketing effort surrounding artificial intelligence (AI). At first, I thought this was merely an effort to join the AI bandwagon.
But after looking at the platform's weak user engagement levels compared to competitors, I became more convinced that the company is trying to pivot its business model. In other words, since Reddit does not have reach that's commensurate to some of its peers, it could have a difficult time attracting more advertisers.
For this reason, AI could represent some new avenues for growth. Specifically, Reddit is experimenting with data licensing. According to regulatory filings, it has signed $203 million worth of data licensing deals. In essence, this gives customers such as Alphabet access to Reddit's data library, which they can use to help train their own generative AI systems.
I'll admit that this strategy intrigues me. But given its newness, I think it's too early to label Reddit as a pure-play AI opportunity.
Watch out for meme potential
The last area that makes me a little skittish about Reddit's investment prospects is its potential to become a meme stock. To be fair, technically any stock could become a meme investment if it begins to experience abnormal trading volatility that is seemingly disconnected from the underlying fundamentals of the business.
I see things a little differently with Reddit, however. The capital markets experienced an unprecedented jolt a few years ago, and a source of this movement was GameStop stock. A day trader named Keith Gill -- known as Roaring Kitty on Reddit -- was the main personality behind the GameStop saga.
Gill began posting his thesis behind GameStop stock in a subreddit called r/wallstreetbets. Normally, I'd say this was an anomaly. But in Reddit's own S-1 filing, the company specifically calls out r/wallstreetbets as a risk factor.
This doesn't necessarily mean much, but I think prudent investors might want to think twice about potentially rolling the dice on Reddit stock, which I see as the capital markets' poster child for casino-like investments.
While Reddit could be a good opportunity in the long run, I think investors should monitor how the data licensing agreements play out and assess whether the company is contributing to the AI narrative in its own unique way. For now, I think there are more-proven and established players in the social media landscape, and I would look for value in those.
